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Misspecified asset price models and robust hedging strategies 

Authors: Hyungsok Ahn Adviti Muni; Glen Swindle
DOI: 10.1080/135048697334818
Publication Frequency: 6 issues per year
Published in: journal Applied Mathematical Finance, Volume 4, Issue 1 March 1997 , pages 21 - 36
Number of References: 40
Formats available: PDF (English)
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Abstract

The Black-Scholes theory of option pricing requires a perfectly specified model for the underlying price. Frequently this is taken to be a geometric Brownian motion with a constant, known volatility. In practice, parameters such as the volatility are not known precisely, but are simply estimates from either historical prices or implied volatilities. This paper presents a method for constructing hedging (trading) strategies which are robust' to misspecifications of the asset price model.
Keywords: Incomplete Markets; Option Hedging Strategies
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